July 30, 2014, 9:03 AM

UPS invests $175 million in holiday delivery preparations

Outgoing CEO Scott Davis does not rule out a peak season surcharge in the future.

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UPS is investing heavily in making sure it can deliver holiday gifts on time, and not ruling out that it might one day charge retailers higher prices for peak-period deliveries.

“We definitely are planning and expecting a clean peak season,” UPS chairman and CEO D. Scott Davis told analysts today in discussing the company’s second quarter financial results. Among other things, the delivery service will be fully open for pick-ups and deliveries on Black Friday, the day after Thanksgiving, hoping to ease the strain of orders that come in on what is increasingly a heavy holiday shopping weekend for web retailers.

E-commerce deliveries and international shipments accounted for a 7.2% increase in year-over-year deliveries. In the U.S. daily package volume increased 7.4%, mainly driven by deliveries of lightweight online retail orders. UPS SurePost shipments—in which UPS hands off a package to the U.S. Postal Service for delivery to a consumer’s home—grew 60% compared to Q2 last year and accounted for half of U.S. package volume growth.

UPS, which admitted it was unprepared for the online volume of last holiday season and took some responsibility for large numbers of late deliveries of Christmas gifts, says it is investing $175 million to improve holiday operations.

Besides staying open on Black Friday, the company says it is accelerating the deployment of navigation software for drivers and adding temporary capacity. More than half of that spending will come in the fourth quarter, including operating all pick-up and delivery operations on the day after Thanksgiving.

“That is an additional expense, but what we have to realize is it smoothes out the cyber-week volume, allows us to better manage e-commerce demand, and some of that cost will be offset by more efficient operations for the following week,” chief operating officer David Abney told analysts today, according to a transcript of the conference call by Seeking Alpha. Abney added later that, given the growth in e-commerce shipments, “we probably should have been investing at a slightly faster pace.”

Asked about the possibility of adding a surcharge for peak periods, Scott responded that UPS’ long-term strategy is to seek 2-3% annual price increases. But, he added, if e-commerce volume continues to growth, “everything is on the table and that could include a surcharge to peak in the future.” UPS has announced that Scott will step down as CEO on Sept. 1 and that Abney will move into that job. 

For the quarter ended June 30, UPS reported:

  • Total revenue increased 5.6% to $14.26 billion from $13.50 billion in the second quarter of 2013.
  • U.S. domestic package revenue increased year over year 5.1% to $8.66 billion from $8.24 billion.
  • International small package revenue grew 6.2% to $3.25 billion from $3.06 billion.
  • Supply chain and freight revenue increased 6.4% to $2.34 billion from $2.20 billion.
  • Net income was $454 million compared with $1.07 billion in the prior year. Profit fell as the result of a one-time expense of $665 million to cover union health and pension-related liabilities, the company says.
  • The number of daily packages shipped was 16.859 million, up by 7.2% from 15.722 million in the second quarter of 2013.

For the first six months UPS reported:

  • Total revenue increased 4.1% to $28.04 billion from $26.94 billion in the first six months of 2013.
  • U.S. domestic package revenue increased year over year 3.9% to $17.15 billion from $16.51 billion.
  • International package revenue grew 5.5% to $6.37 billion from $6.04 billion.
  • Supply chain and freight revenue increased 3.0% to $4.51 billion from $4.38 billion in the first six months of 2013.
  • Net income was $1.36 billion compared with $2.10 billion in the prior year.
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